MEANING OF PREFERENCE SHARES
Preference shares are defined as those shares which are given priority over other equity shares in terms of the payment of dividends. These shares provide the shareholders with the special right to claim dividends during the company lifetime, and also with the option to claim repayment of capital, in case of the wind up of the company.
Preference shares are also known as preferred stock, and the capital raised by issuing preference shares is known as preference share capital.
However , unlike common shareholders, the preference shareholders do not hold any voting rights.
TYPES OF PREFERENCE SHARES
The following are the various types of preference shares –
- CUMULATIVE PREFERENCE SHARES – Shares having right of dividend even in those years in which it makes no profit are known as cumulative preference shares. In other words, if the company doesn’t have the ability to meet the obligation of paying dividends to its shareholders, the cumulative dividends can be paid in later years as arrears.
- NON-CUMULATIVE PREFERENCE SHARES – The term “non-cumulative preference shares” refers to the variant of preference shares for which the issuing companies are not obligated to pay the stockholders any unpaid or omitted dividends. The dividends are paid only from the net profit of each year.
- PARTICIPATING PREFERENCE SHARES – Participating preference shares is where the company issuing the dividends pays increased dividends to the shareholders along with the preference dividend. These shares have the right to participate in surplus profits of the company during liquidation after the company had paid to other shareholders.
- NON PARTICIPATING PREFERENCE SHARES – Those shares which are entitled only to the dividends at a fixed rate and not to the surplus profits or in any surplus on liquidation of the company are referred to as non-participating preference shares.
- CONVERTIBLE PREFERENCE SHARES – The preference shares which can be converted into equity shares at a fixed rate, after the expiry of a specified period as mentioned in the memorandum are known as convertible preference shares.
- NON CONVERTIBLE PREFERENCE SHARES – Those shares which can not be converted into equity shares are known as non convertible preference shares.
- REDEEMABLE PREFERENCE SHARES – Those shares which can be redeemed or repaid after the fixed period as issued by the company or even before that are known as redeemable preference shares.
- NON – REDEEMABLE PREFERENCE SHARES – Non-redeemable preference shares are those shares that cannot be redeemed during the entire lifetime of the company, but only at the time of winding up of the company.
Thus, in simple words, preference shares are special type of shares where dividends are paid to shareholders prior to the issuance of common stock dividends. These shares are mostly preferred by those investors who want assured dividends for a sustained period of time.